OraSure Technologies Inc (OSUR) 2008 Q2 法說會逐字稿

Good day, everyone. And welcome to OraSure Technologies 2008 second quarter financial results conference call and simultaneous webcast. As a reminder, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS) To allow time for as many questions as possible, questioners are asked to limit themselves to only a single question with no more than one follow-up question related to the same topic. Once the follow up is completed, a questioner can rejoin the queue for further questions.

For opening remarks and introductions, I will now turn this call over to Judy Clarke at OraSure Technologies. Please go ahead.

Good afternoon, everyone. And thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release at approximately 4:00 p.m. eastern time today regarding our 2008 second quarter financial results and certain other matters. The press release is available to you on our website at www.orasure.com or by calling (610) 882-1820. If you go to our website, the press release can be accessed by opening the Investor Relations page and clicking on the link for news releases.

This call is also available real time on our website and will be archived there for seven day. Alternatively, you can listen to an archive of this call until midnight, August 12, 2008, by calling (800) 642-1687 for domestic or (706) 645-9291 for international. The access code is 56781070.

With us today are Doug Michels, President and Chief Executive Officer, and Ron Spair, Chief Operating Officer and Chief Financial Officer. Doug and Ron will begin with opening statements, which will be followed with question and answer sessions.

Before I turn the call over to Doug, I must also remind you that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings per share, and other financial performance, product development performance, shipments and markets, and regulatory filings and approvals. Actual results could be significantly different. Factors that could affect results are discussed more fully in the SEC filings of OraSure Technologies, including its annual report on Form 10-K for the year ended December 31st, 2007, its quarterly reports on Form 10-Q, and its other SEC filings.

Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call.

With that, I would like to turn the call over to Doug Michels.

Okay. Thank you, Judy. And good afternoon, everyone. And welcome to our second quarter 2008 conference call. In a press release issued earlier today, we announced our second quarter results and provided an update of our third quarter financial guidance. Ron Spair will review both of these in a few minutes.

Our second quarter revenues were in line with our guidance. And we did a bit better than our guidance on the bottom line. As Ron will further explain, we are changing our policy for updating forward-looking guidance beginning with this call to provide a forecast for only the next quarter, in this case the third quarter.

Following Ron's remarks, I will address the recently reported performance issues involving our OraQuick test and then describe additional business developments, including the progress we are making in our major clinical and development programs. We will then conclude the call by opening the floor for your questions.

Before turning the call over to Ron, I would like to address two other announcements, which we made earlier today. Before today's call, we issued a second press release announcing a share repurchase program. Under this program, we may purchase up to $25 million of our common stock, based on market conditions, at times and prices to be determined in our discretion. Our Board of Directors has authorized this repurchase program primarily because we think the price of our common stock does not reflect the earnings potential of the Company.

While we are working through near-term challenges in certain segments of our business, we are confident that achievement of the Company's long-term goals is still on track. Specifically, the replacement of lost revenue from the cryosurgical channel has been a significant challenge. Not surprisingly, when guidance was adjusted lower earlier this year, the stock sold-off, putting downward pressure on the stock price. Moreover, the news regarding discordant results with the use of OraQuick for oral fluid tests in the New York City STD clinics put further pressure on the stock.

We are actively taking steps to address the issues that have pressured the stock. Starting in Q1 2009, we plan to return to the US market with an over-the-counter cryosurgical product and begin to rebuild that channel. We are also nearing the point in time when we will be able to extend the shelf life of our OraQuick domestic product. And we are on track with our HIV-OTC and our HCV clinical programs. Finally, our infectious disease business continues to grow. And we believe we are well positioned to compete in that market.

So after considering the above factors, we believe now is an appropriate time to initiate a share buyback program. Our strong balance sheet will allow us to repurchase shares based on current market conditions.

Earlier today, we also announced some organizational changes in a Form 8-K filed shortly before the call. In reviewing our recent business performance, we have decided to take several steps to improve certain areas of our business, which in turn should improve our operating results. These actions will enable us to sharpen our focus on the key drivers of our business and accelerate achievement of the high-potential value of our strategic programs. Specifically, these actions will initially involve some reassignments of executive responsibilities along with a significant organizational change.

First, Joe Zack, OraSure's Executive Vice President of Marketing and Sales, will be leaving the Company as of August 29th. Joe has been an important part of senior management at OraSure for the past six years. Joe has agreed to consult with us as he moves out of the Company and will provide transitional support and assistance with our sales and marketing programs.

Effective immediately, I will assume--I will personally assume responsibility for the day-to-day operation of our Sales and Marketing Department. As many of you know, before joining OraSure, I spent 20 years at Johnson & Johnson with many of those years in senior sales and marketing positions, both in the United States and internationally. I intend to use this experience to drive our sales and marketing efforts on our infectious disease and substance abuse testing businesses.

My direct, day-to-day involvement has already begun and is critical not only to improving our existing business performance but also to maximizing our future opportunities once we obtain FDA approval of our OraQuick HCV test and OraQuick HIV test for sale over the counter.

A second change within the Sales and Marketing arena is in the international space. Our current Vice President of International Sales will be leaving the Company at the end of August. International markets continue to be an important component of our overall business. And our plan is to bring in additional depth and experience in this area. Once a new head of international sales is appointed, that individual, along with the heads of our domestic sales organization and our marketing organization, will report directly to me.

We have also decided to make a significant organizational change involving our cryosurgical systems business. We believe this business can achieve a significantly higher return than shown by our results over the past few years. In addition, as previously disclosed, we plan to be back in the U.S. OTC cryosurgical market beginning in 2009.

It is therefore critical that we focus additional management attention on this business. To do so, we are establishing a global cryosurgical systems business unit which will be headed by Mike Formica, who is currently the Company's Executive Vice President of Operations. Mike will assume the new position of Executive Vice President and General Manager for Cryosurgery and will focus exclusively on our cryosurgery franchise worldwide.

Mike joined the Company in 2000 and has made substantial contributions to our operations, particularly on the manufacturing side. However, Mike has much broader management experience. Prior to joining OraSure, he was the Division Manager of Mobile Measurement Technologies for an affiliate of Drager Safety AG in Lubeck, Germany. Mike held this position for eight years and had worldwide responsibility for all facets of the business unit, including marketing and sales and operations. We believe this experience can be more fully utilized by giving Mike direct and complete responsibility for the cryosurgical business and provide more focus on this important business.

Mike's responsibilities will include both the professional and over-the-counter cryosurgical product lines, along with ancillary support functions for these products. Mike will also continue to oversee operations under the direction of Ron Spair until a new head of operations is recruited and hired.

The foregoing changes are an important part of our efforts to reinvigorate and refocus our current operations and plan for new product offerings as we achieve our strategic development goals. We are working hard to accelerate this process and will continue to evaluate whether additional changes are needed.

And with that, let's move to Ron's financial overview.

Thanks, Doug. First, I will start with a brief review of the second quarter results. Total revenues for Q2 were in line with guidance at $18.9 million. Increased sales of our OraQuick ADVANCE and insurance risk assessment products and higher product development revenues were offset by expected decreases in revenues from our cryosurgical products and lower substance abuse testing sales.

A 9% growth in our infectious disease revenues was the result of continued strong performance by our OraQuick ADVANCE HIV test in an increasingly competitive environment. Sales to public health during the quarter increased 25% over 2007, as a result of continued growth in our base business and incremental sales driven by the Centers for Disease Control and Prevention's efforts to increase HIV testing among populations disproportionately affected by HIV.

International sales of OraQuick increased 36% compared to the same period in 2007, largely as a result of a 48% increase in revenues from Africa. Our sales to Abbott decreased 4% as a result of their ordering patterns for the U.S. hospital market.

Our cryosurgical revenues during Q2 experienced an overall decrease of 53% compared to 2007. This was expected because of the absence of U.S. OTC sales in the current quarter resulting from the termination of our distribution relationship with Prestige Brands at the end of 2007. Second quarter 2007 sales to Prestige were $983,000.

Our international OTC sales for the second quarter 2008 were $1.1 million, a 64% decrease from 2007 that resulted from reduced sales in Europe as well as the absence of sales in Mexico. As we explained during our first quarter conference call, our Latin American distributor, Genomma, reduced its purchasing levels this year in response to an increase in returned product from retailers due to overstocking during the winter months.

Second quarter cryosurgical sales to the international professional markets increased 30% to $665,000, offset by a decrease in U.S. professional sales of 26%. This decrease has been traced to diversion of some lower priced Histofreezer product from several International distributors into the U.S. professional market. We intend to address this diversion by increasing our international pricing and enforcing contractual rights against certain international distributors.

In substance abuse testing, sales were $3.7 million for the second quarter, a 16% decrease compared to 2007. Sales of our Intercept drug testing system totaled $2.9 million, a 19% decrease from 2007. Our total workplace testing business was down 36%. And our international sales were down 11%. Our criminal justice and direct sales grew 7% and 25%, respectively, for the quarter.

The Company's workplace testing business continues to be directly impacted by the decline in employment rates in some of the market segments that buy our Intercept product. The international market has also experienced a decrease in public sector funding which has slowed the implementation of drug testing in those markets.

Finally, insurance risk assessment sales in the second quarter were $1.7 million, up 25% compared to $1.4 million in the comparable period of 2007. While we are adding new accounts for this product line, the increase in the current period was largely caused by lower sales during the early months of 2007.

Second quarter 2008 licensing and product development revenue included $804,000 in royalties from Schering-Plough related to sales of their OTC cryo product in the U.S. market. Second quarter 2007 revenues included $649,000 of funded R&D under our domestic HCV collaboration agreement with Schering-Plough.

Turning to gross margin, our margin for Q2 of '08 was 59%, a decrease from 63% for the second quarter of 2007. The margin decline for the current quarter was primarily due to an unfavorable product mix versus the year-ago period.

Operating expenses--research and development expenses for Q2 were up 85%, or approximately $2.8 million, representing approximately $0.04 per share after taxes over 2007. This largely as a result of costs associated with our ongoing OraQuick HIV OTC and HCV clinical development programs.

Sales and marketing expenses decreased 5%, or approximately $287,000, mostly due to a decrease in advertising reimbursement costs related to our international OTC cryosurgical products and decreased consulting costs in our marketing department. These lower costs were partially offset by increased staffing and related charges.

G&A expenses decreased approximately $435,000, largely as result of a decrease in legal costs compared to the second quarter of 2007.

From a bottom line perspective, we reported a net loss of $2.2 million, or $0.05 per share, which is slightly better than our guidance. This compares to net income of $955,000 or $0.02 per share for the same period of 2007.

Turning briefly to our balance sheet and cash flow, our cash balance remained strong with cash and short-term investments of $91 million and working capital of $104.4 million at June 30th, 2008. During the first six months of the year, we used $1.9 million in cash flow from operations compared to $2.7 million provided from operations during the first six months of 2007.

The use of cash in 2008 was largely due to decreased net income and payments of royalty obligations and legal expenses that were accrued at the end of 2007, as well as an increase in our inventory and accounts receivable balances. Days sales outstanding was at 61 days compared to 63 a year ago.

Now turning to our financial guidance update, as Doug discussed earlier in the call, there are many developments and factors that will make it difficult to provide the investment community with long-term forward-looking guidance. After much consideration, we've decided to change our guidance policy. We have always strived to provide accurate and timely guidance. But for the following reasons, we think it is prudent to limit our forecasts to the upcoming quarter at this time.

As you know, we are in the process of two major clinical initiatives and a patent infringement lawsuit with Inverness and Church & Dwight. Spending levels can vary substantially based on the pace of clinical trials and timing of litigation. On the revenue side, there's also the potential for variability given the timing of purchase orders. Rather than issue guidance with broad ranges, we prefer to provide short-term guidance that is more specific. Therefore, until we are able to provide longer-term guidance with more confidence, we will be issuing forward-looking guidance only for the upcoming quarter at each quarterly call.

With respect to the third quarter, we now project that revenues will be in the range of $16 to $16.5 million. And our loss per share will approximate $0.09. In the aggregate, this would bring our total revenues through September 30th, '08 to between $53.5 million and $53.8 million. We would expect to provide updated guidance for the rest of 2008 during our Q3 conference call.

And with that, I'll turn things back over to Doug.

Thanks, Ron. And we will now discuss various strategic and other business matters. As you know, there were recent reports by the CDC and in the media regarding a slightly elevated number of discordant results from use of our OraQuick ADVANCE HIV test with oral fluid at several STD clinics operated by the New York City Department of Health and Mental Hygiene.

While discordant results did occur at these clinics, we believe the public reporting of these events was not very balanced and did not present an accurate or complete picture of the performance of our test.

I think you know that all screening tests generate a certain percentage of false positive results. This happens with our test as well as the blood tests sold by our competitors. That is one of the reasons why specimens that screen positive for HIV must be confirmed by additional testing.

Data from the STD clinics in New York for the period October 2007 to April 2008 showed an average specificity of 99.4%, or 0.2% below the lower end of the expected range of specificity of 99.6% for our OraQuick ADVANCE test. In terms of overall accuracy, the deviation from expected performance occurred during a limited period of time at a small number of testing sites.

As we previously announced, we've collected national surveillance data for approximately 400 sites and over 250,000 individual tests during the same time period as the New York City data. This data indicates that our test performed at 99.8% specificity across the country, excluding the New York data. Moreover, specificity with oral fluid in the New York City STD clinics returned to 99.9% during the month of May with nearly 5,000 oral fluid tests performed. This performance is at the upper end of our FDA-approved label claims.

Contrary to the suggestion in many media reports, New York City did not stop purchasing or using our test. OraQuick ADVANCE continues to be used for HIV screening with blood samples in the STD clinics, and with oral fluid and blood at HIV and TB clinics throughout the city.

Our FDA-approved labeling for the OraQuick ADVANCE test indicates that the test is slightly less specific when used with oral fluid compared to when it is used with blood. For example, it's 99.8% specific with oral fluid versus 99.9% with blood. However, our OraQuick oral fluid test is actually more specific than several of the competing rapid laboratory-based HIV blood tests.

Because of its accuracy, its ease of use, and noninvasive nature of rapid oral fluid testing with OraQuick ADVANCE, this has substantially increased the number of individuals who get tested in New York City. In fact, data at some sites indicates testing increased by as much as 30% due to the availability of oral fluid testing. So it's not surprising that oral fluid is often the testing matrix strongly preferred by both patients and testing sites over blood.

The OraQuick test has and it continues to work exceptionally well, despite New York's recent experience. Nevertheless, we are determined to figure out why New York experienced the slight deviation from expected performance earlier this year. We've met with both the city and the CDC to investigate the discordant results. And we're committed to determining the root cause of their experience, if possible.

We are also currently undertaking our own experimental and clinical studies to determine if there are any potential site-specific or patient factors which could have caused the discordant results. These factors have not yet been ruled out.

Although finding the root cause for the New York City discordant results is a top priority, this is not an easy task. Our OraQuick ADVANCE test continues to perform at a very high level and within its FDA approved claims throughout the country. The reports of false positives that we've seen in the past and more recently in New York City appear to be infrequent and not widespread. Moreover, as was the case with New York City, any deviation from our label claims is usually quantitatively very small.

And the bottom line is that we have very robust systems in place to monitor the product's performance. And we remain confident in the performance of the product and believe it will continue to be widely used and play an important role in the fight against HIV/AIDS.

On a related topic, there was an article published yesterday in the Annals of Internal Medicine regarding an early 2007 study by Brigham and Women's Hospital on the rate of false positive results with the use of the OraQuick ADVANCE oral fluid test in a low-prevalence hospital emergency department population. The authors of the study concluded that there is a higher rate of false positives when using the OraQuick oral test with this population.

However, these results are not consistent with other published studies and our own national surveillance data, which have affirmed that the test performs as expected and according to product claims. For example, a study published in late 2007 in December where OraQuick was used to screen almost 2,500 emergency department patients at George Washington University Medical Center demonstrated specificity of 99.8%, which is, again, directly within our FDA-approved label claims. The product continues to perform exceptionally well.

Turning to our clinical development programs, the ongoing clinical work to obtain FDA approval for an OraQuick rapid HIV OTC test continues to go extremely well. As previously discussed, we started our observed user clinical study earlier this year. This is where we assess an individual's ability to interact with our packaging and comprehend the instructions for use to take the test and interpret the results while a trained professional observes those activities.

This study was initiated in April. And I am happy to report that we recently completed testing for the first 1,000 subjects and believe we have met the stopping criteria under our protocol. What this means is that at a predetermined point in the testing we were permitted to examine the data to see if we have met the 95% confidence intervals for specificity and sensitivity thresholds, which were initially established by the FDA for this phase of the trials. We believe the data shows this. And we have stopped the observed user study.

Another requirement of this study was to identify a minimum of ten previously unidentified HIV-positive individuals. We also successfully met this criteria. Twelve newly identified HIV-positive individuals were found in our testing of healthy subjects and all 12 initially HIV-positive persons have been confirmed positive by Western blot.

We are now compiling the data. And we intend to submit it to the FDA for its review. We have also requested a meeting with the FDA to review this information and discuss the next steps. This is all extremely promising. And we expect to meet with the FDA and move this project forward as quickly as possible so that a final submission can be made.

One final item I'd like to mention is the performance of our resource and referral system for consumers during the observed user study. This call center was available throughout the trial and was manned by trained and certified call agents. And it performed very well. Specifically, approximately 5% of the subjects during the trial interacted with the call center. This level of interaction provided valuable information that will enable us to estimate the expected usage of the call center and the types of questions and requests that we can expect to receive once the product is being sold to consumers.

Moreover, the system was challenged by an unexpected power outage resulting from a severe storm, during which our contingency operational plan was successfully implemented without disruption of service to our clinical trial subjects, which demonstrates the robustness of the system as designed.

Overall, this project is progressing exceptionally well. Our schedule remains on track. And we look forward to updating you on additional developments as they occur.

Additionally, we've made excellent progress in our clinical trials to support both our PMA submission to the FDA and our request for CE mark approval in Europe for our OraQuick HCV test. We have completed enrollment of patients for the main clinical study to support product claims. We are currently engaged in data analysis and writing our clinical reports, as well as preparing other required manufacturing and quality documentation, which will be included in our FDA and CE submissions. We expect to file our initial PMA application with the FDA in September and to submit for European approval shortly thereafter.

In addition, we are engaged in collaborations with various scientific and medical groups, both in the U.S. and Europe, who are interested in evaluating the performance of the OraQuick HCV test. The purpose of these studies is to evaluate the utility of the product in typical use settings and in the hands of independent testing centers prior to launch. These studies will continue throughout the year, and we expect results to be published in the near future.

Our efforts to extend the shelf life of our OraQuick HIV test also continue to progress smoothly. We now have completed testing for 14 months. And we have submitted this data to the FDA in support of a request for shelf-life extension. This improvement in stability is based on process changes in the manufacture and packaging of the OraQuick device that we submitted to the FDA previously. The FDA has requested a small additional study in support of the process changes, which we plan to perform in the next month and then submit those to the FDA.

For markets outside the United States and Europe, we recently extended the shelf life and product dating of OraQuick to 12 months, based on previously generated stability data. This extension applies to product manufactured by our Thailand supplier. In the next 30 days, we expect to request a shelf-life extension to 12 months from our notified body in the European Union.

We are pleased with the progress made so far on extending the shelf life of our OraQuick HIV test. And we continue to make this a top priority.

Our work with Roche Diagnostics to develop fully automated homogeneous drugs of abuse assays for use with our Intercept oral fluid collection device also continues to progress extremely well. The initial launch menu will be a NIDA-5 panel consisting of amphetamines, methamphetamines, cocaine, opiates, cannabinoids or THC, and phencyclidine or PCP.

Performance data for several of these tests was recently presented at the American Association of Clinical Chemistry meeting, which was held in Washington D.C. during a workshop on oral fluid drug testing that we co-sponsored with Roche.

In addition, we recently conducted successful evaluations of several prototype automated assays at consumer sites. And we expect to expand these evaluations at other sites throughout the year.

And a final development project that we've mentioned in prior calls is to obtain FDA approval of a new HIV laboratory-based enzyme immunoassay for use in testing oral specimens collected with our OraSure collection device.

The OraSure device is used primarily in the insurance risk assessment testing and public health markets. As you may recall, last year bioMerieux indicated that it would cease manufacturing the only HIV-1 immunoassay approved for use with our OraSure collection device.

We have identified another blood-based HIV immunoassay, which, with some optimization, we believe can be used with oral specimens collected with an OraSure device to screen for HIV. The optimization is close to being finalized. And we are preparing to launch clinical trials to obtain FDA approval of this assay for use with the OraSure collection device. These clinical trials will also incorporate the use of our oral fluid Western blot as the confirmatory test for oral specimens that initially screen positive with this new assay.

We expect these clinical trials to begin shortly. And our submission to the FDA will be made as soon as possible after they are concluded.

As you know, a lawsuit was filed against OraSure by Inverness and Church & Dwight for patent infringement under one of their U.S. patents. We have filed a response to the complaint. And a scheduling conference is planned for August 7th. We would expect discovery to start later this year and extend through most of next 2009. Any trial would likely occur some time after that.

We continue to believe that our OraQuick ADVANCE HIV test does not infringe the patent asserted in this lawsuit and that the Inverness and Church & Dwight patent is both invalid and unenforceable. Additional updates on material developments will be disclosed as they occur.

And with that, let us now open the floor to questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Ed Shenkan with Needham & Company.

Thanks, Ron and Doug. Are we doing financial questions first and then others or just everything together.

Everything together.

All right, good. So the Walenski article from the Annals of Internal Medicine showed specificity of 96.9% with 849 patients. What implications do you think that's going to have on the OraQuick product going forward?

Ed, this study that was conducted at Brigham & Women's was a study conducted in early 2007. It was actually presented earlier this year at a retrovirology conference. This was a study that was done on, as you indicate, a relatively small sample size. There were a number of individuals who refused confirmatory testing as part of this study. And you also note that approximately half of those tests that went on for confirmatory testing were Western blot indeterminate.

I think that like any study of this nature, it has to be evaluated in the context of the national performance of the product and how the product's performing elsewhere. I highlighted in the previous comments the study that was also presented in a peer-reviewed journal in December of 2007. This was a study conducted at George Washington University Hospital, again an application of the OraQuick test with oral fluid. The study was conducted in late 2006. There were 2,500 or 2,486 subjects tested in this study. And the specificity was 99.8%.

I think all these things have to be taken in context. And I don't anticipate this is going to have any impact on the product. Like I said earlier, we have a robust system for monitoring and managing the performance of our product. And all the data that we have indicates the product is performing exactly to its FDA-approved product claims.

You mentioned on the OraSure product that you're doing a newer confirmatory test and some things going on there. Is there any change on your revenue expectations for that OraSure product? Is there anything going on other than what you mentioned here about it?

No. The OraSure revenues have been declining on a quarterly basis--I would say it's generally accurate statement--primarily we believe due to some cannibalization from the OraQuick rapid antibody test. But the OraSure collection device still remains a valuable tool for collecting a noninvasive sample, both in the public health sector as well as in the insurance testing market. And we expect that business will continue to be an important contributor for the foreseeable future. That's why we're working on validating and getting FDA approval for a replacement assay to be used with the oral fluid collector.

And your guide for the third quarter of $16 million to $16.5 million, is that below what you were previously expecting? Just trying to figure out, you withdraw your '08 guide, trying to understand if it's because that '08 guide was too high. Or is that an incorrect conclusion to draw?

I think since the last call, there have been further developments in the business, including some delays and reduction in the total number of OraQuick devices being purchased pursuant to the CDC initiative. The continuing malaise in the U.S. marketplace for substance abuse testing, as Doug talked about and as I had mentioned, diversion of lower-priced international products into the U.S. professional Histofreezer market place. So all in all, in combination, that resulted in a lower number for what our--currently than what our expectations had been previously.

That's helpful. Thank you.

And your next question comes from the line of Aaron Lindberg with William Smith & Company.

Thanks. What progress are you having in your dialogue with government bodies, HHS, CDC, NIA, things like that for funding for rapid HCV testing?

We've forged a very strong dialogue with NASTAD, the National Association of State and Territorial AIDS Directors, who are very supportive of advocating for increased funding for HCV prevention efforts. We're in discussions with the VA health system, who also are keenly interested in expanding HCV testing along with HIV testing. The Substance Abuse and Mental Health Services Agency is keenly interested in deploying rapid hepatitis C testing into their patient population, which is disproportionately impacted by hepatitis C. And so we have a lot of activities ongoing to ensure that once the product is made available that people are going to be prepared to begin using.

Okay. To follow up on Ed's question, what specifically is your strategy to proactively address the issues of specificity and false positives? It's something we've talked about, obviously, for a long time on the calls here with things that have popped up from time to time. But can you help us understand what's your strategy for dealing with this? It's likely to continue to happen when you look at smaller sample sizes. But what can be done proactively to deal with it because when it pops up in the press, it's certainly going to provide a challenging environment for you?

Right. And I think I want to just reemphasize that, first of all, we're talking about a very infrequent event. The product, as we've disclosed and published data and shared our surveillance data, performs routinely at 99.8% specificity.

We've been in dialogue with New York City. And as we emphasized in May, their performance went right back to 99.9% specificity. So as we go to investigate a cause of any reported false positives, we're dealing with a very, very small number of subjects and a very rare occurrence.

Our test performing at 99.8% specificity is one of the highest performing assays in diagnostics, whether it's laboratory based or rapid testing based. That doesn't mean that we're not trying to identify what is going on in those rare instances. And we're looking at patient-related factors. I mean, that becomes difficult because you have to call those patients back. And generally, health departments are somewhat reluctant to do that.

The other option is to initiate a prospective study looking forward. But that would require tens of thousands of patients, subjects to get a statistically relevant number of false positive test results with a product like ours that performs so well. So this is a very challenging, challenging issue, primarily because the test is so robust.

Yes, and I guess my question--what I'm really trying to focus on is really the PR aspect of it, not so much--I think I have a good grasp on what do you do at the individual facilities and how do you go back and try to tackle it. And sometimes it's challenging to get the information. But in the media and on the competitive front, how do you deal with it there?

Well, and that's where I think we have to continue to do as good a job as we can to communicate, to share our surveillance data, to make sure people are aware of these studies, like I referenced in the call from GW that was published in a peer-reviewed journal. These don't get the same level of press coverage because it's not a sensational story. But they're equally relevant and I think reflective of how the product is being--is performing.

I think it's also important that we look at the specifics of, in this example, the Brigham and Women's commentary. They say that we continue to use this test in our study at Brigham and Women's Health Emergency Department. We recognize that screening tests have tradeoffs. And this is a very valuable tool. The advantages are that it's easy to use, acceptable to patients, and has correctly identified cases of infection that we otherwise would've missed.

So it has to all be taken together. We've got to do a better job communicating. And we're committed to that. But the test is performing exceptionally well.

Okay. One other quick one, and I'll jump back in the queue here. In the NASTAD report, the highest rated factor in determining which test to use is price. What is your strategy for maximizing your leadership position in the public health market?

Aaron, I think that the data also speaks for itself. While people will respond to a survey and say that the number one determinant for using a product is price, the fact is that 20 of the 23 jurisdictions in the most recent CDC funding initiative used OraQuick as their front-line test. And as you know, it's not the least expensive test. So how they respond to a survey and how they behave in actual practice has to do with the versatility of the test, the accuracy of the test, the ease of use, the patient acceptability of the test, the performance of the test. And of course, price comes to play.

So it's all about value. And I think that over the last several years where we've competed with lower-priced assays, we've continued to demonstrate that we're delivering value to our customers. We're not resting on our laurels that we continue to sell the value everyday. But I think that results speak for themselves. I think we're holding our own.

Great. Thanks. I'll jump back in the queue.

And your next question comes from the line of John Putnam with Dawson James Securities.

Yes. Thanks. I wondered if you might elaborate a little bit on what's going on with Abbott and when you might expect to see some increased sales to the hospital market.

Abbott's out sales in June were the highest month that's been recorded since we've been in the relationship with them. That being said, as we mentioned previously, we want to do a better job in the hospital market. And we want Abbott to do a better job in the hospital market as well.

One of the issues that we deal with that's very hard to quantify is a number of hospitals in the U.S. market actually work in collaboration with their public health partners. To give you an example, in Washington D.C., where the D.C. Department of Health purchases tests from us directly. And then they in turn distribute those at no cost to several hospitals. And we're seeing more of that take place as hospitals work with public health departments to expand rapid testing and to implement routine screening in their emergency departments and the like.

So our data says that the hospital consumption of units is actually increasing more than what's showing up in our transfer to Abbott reports. And we'll try to give as much visibility as we can to that as that trend increases. But the hospital business is strong. Obviously, we want all of our businesses to perform better.

Sort of sounds like you're competing with yourselves there then.

Actually, what happens is we sell into the public health market and at a little higher ASP. So there's some benefit.

Okay. Then talking about the CDC funding, where are we kind of in that cycle now, Doug?

Well, the incremental funding, the $35 million that was granted and distributed to the 23 jurisdictions back in September of 2007, that was to be spent October 1 through September 30th, 2008. So we're through nine months of that. We have not seen the level of deployment nor consequently purchase of rapid tests that were originally expected out of that original CDC deployment.

If you recall, when the CDC announced this program, the indicated that they were going to make $35 million available to the 23 jurisdictions. And their target was to test 1.5 million incremental individuals. And the hope to yield an incremental 25,000 additional positives. Shortly after the grant was made, they reduced their expectations down to 1 million incremental individuals and approximately 20,000 newly identified positives.

As we projected our 2008 revenues from this new initiative, we took what we believed at the time was a very conservative approach to forecasting. We actually discounted the expected number of tests that we would expect from the CDC program. And we obviously factored in the percentage of sites that we believed were going to using the OraQuick ADVANCE test for their screening program.

Unfortunately, where those jurisdictions are right now is we believe they're going to come in woefully short of that 1 million units of incremental tests that they've committed to and have received funding for. And why are they going to be short? I think part of it is just some deficiencies in execution. Part of it is the fact that the CDC's indicated to those sites that they'd be able to carryover those funds into the fourth quarter and into 2009. The CDC has also emphasized and committed to the jurisdictions that they will be refunded for fiscal year 2009. So the accountability issue has not really been all that strong.

You probably picked up out of the International AIDS Conference in Mexico, the CDC just released their new estimates, where they indicated that estimated incidence of HIV infection is up 40% versus previously reported estimates. And I think there's going to be--well, I know. We've already seen it from the Latino Commission on AIDS, the National Black Leadership Commission on AIDS, the Black AIDS Institute. There's enormous pressure on the CDC as well as the U.S. government to make sure that the money follows the epidemic.

And all this money was targeted toward the heightened response to HIV/AIDS among African-Americans. And I think there's going to be congressional hearings relative to this. And I think there's going to be a national call to action, which I think is, A, it is appropriate, and B, I think is going to be good for the Company over the coming years.

Thanks very much.

And your next question comes from the line of [Shawn Bevick] with [SIG].

Hi, Shawn.

Hi, guys. How you doing?

Hi, Shawn.

How are you, Shawn?

I'm doing good. With regards to your third quarter guidance, it's about $3 million below what you guys did this quarter. Is there something you can talk about more specifically in terms of one of the areas that you see impacting this and why we should see that decline so much?

I would say that the sequential revenue decline emanates primarily from the cryosurgery area. And that's from the impact that we see on both the domestic and international Histofreezer professional product as a result of this diversion issue that I spoke of, as well as at this moment in time lack of visibility to orders in the international OTC marketplace, primarily with our partner SSL in Europe.

So this wasn't necessarily anything you were seeing from the OraQuick product.

No, but I did mention that and as Doug just elaborated on, the timing and reduction of OraQuick devices purchased relative to the CDC initiative is below our expectations.

Okay. And with regards to hep C, when is the earliest you guys see approval for this?

We typically haven't commented on expected approval dates because that's out of our control. What we've indicated is--and this goes back several calls I think--that we're going to submit this summer. As I mentioned earlier, we still intent to have our submission in next month as we planned.

So you submit in September for the PMA.

That's right. And then it's in the FDA's hands as to review time. And we were very pleased, just so you know, with how the program's gone. We're crunching the data right now. It's a big data set. We took five samples from--analyzed five samples from every subject, finger stick, venous whole blood, serum, plasma, and oral fluid. So we're dealing with more than 10,000 data points that all has to be crunched and tabulated and analyzed and get submitted.

But every indication is that the products performed consistent with the information we've shared in '06 at the AACC, most recently at the American Society of Microbiologists. And we're looking forward to getting it all in and ultimately getting the product approved.

Okay. One last quick question--do you guys know the specificity of the competitors' products for the HIV blood test, the cheaper one?

Absolutely. And several of them are substantially below our oral fluid specificity. I'll give you an example. Trinity's test is 99.7% with a very broad 95% confidence interval, 99.0% to 99.9%. [Medmera's] test is 99.1% specific. That's with serum. With plasma, it's even worse, 98.6%.

The most recently approved laboratory-based test that came from Johnson & Johnson, it's an automated immunoassay, VITROS HIV test, is 99.6% with a broad confidence interval. And in their clinical data, the five false positives, only one of the them--of the five positives, only one of them confirmed. So they had a 20% confirmation rate on their initial positives.

So all these things--it all has to be understood in context. And I think, Aaron, you asked the question about the public relations and the publicity issue. We've got to do a better job with that. But the test continues to perform exceptionally well. Obviously, we'll let you know if it doesn't. But we remain highly confident.

What was the confidence interval for your product again?

It's 99.6% to 99.9%.

Okay. Thank you.

Absolutely. Thank you. And I think that's going to wrap up the call tonight. I want to thank everybody for joining us, appreciate your comments, and look forward to talking to you next quarter.

And this concludes today's OraSure--